>NIIT Ltd

WHAT’S CHANGED…
PRICE TARGET........................................................................... Changed from | 44 to | 37
EPS (FY13E)............................................................................. Changed from | 7.2 to | 6.6
EPS (FY14E)............................................................................. Changed from | 8.3 to | 6.7
RATING...............................................................................................................Unchanged

ILS weakness to continue…
We spoke with the management of NIIT Ltd to understand the industry trends and execution strategy. Earlier, NIIT reported its Q1FY13 numbers, which were below our estimates. Revenues came in at | 228 crore vs. our | 244.1 crore estimate led by a slowdown in the ILS business. Reported EBITDA of | 11.4 crore (5% margin) missed our | 27.3 crore (11.2%) estimate by a wide margin. PAT (including associate profit) of | 11.5 crore (core operations loss of | 2.3 crore) was also lower than our | 20.3 crore (| 9.8 crore) estimate despite the company having a tax provision reversal of | 34.1 crore related to Element K divestiture. The current backdrop of macroeconomic uncertainties and deferred IT-ITeS hiring influences our estimates and our HOLD rating.

ILS segment slowing down
A weakening economy and deferred IT-ITeS hiring led to ILS (66% of the total revenues) declining 11% YoY to | 107.4 crore. IT training enrolments declined 13% YoY. EBITDA declined by | 8.8 crore YoY led by cost overruns (| 6.6 crore), adverse revenue mix (| 1 crore), cost inflation (| 5.1 crore) partly offset by cost optimisation initiatives (| 3.9 crore). For the full year FY13E, the management commentary suggests ILS revenues could decline ~4-8% while EBITDA margins could fall by 500 bps from16.1% in FY12.

CLS & SLS outlook
The management indicated that the CLS business could grow 20% YoY on a continuing basis (excluding Element K contribution) led by ~40% growth in managed training services (MTS, 72% of CLS) while EBITDA margins could come in at around 10%. The SLS business is expected to be flat YoY as the company transitions from government schools to non government schools. Margins are expected to be around 9-10%.

Reducing estimates but maintain HOLD
We have adjusted our numbers to account for the weakness in the ILS business. We expect revenues and PAT to decline 13.7% and 10%, respectively, in FY13E and grow 10% and 2.2% in FY14E, respectively. We continue to value NIIT on an SOTP basis with a target EV/EBITDA multiple of 1.8x on our CY13E EBITDA to account for the current ILS slowdown and refilling of Element K revenues that remains crucial.